The prices of electricity, coal, petroleum and many other kinds of goods are ready to “fly high” as the government’s price-pulling deadline is approaching (end of May 2008).

The power sector is urgently compiling a plan for increasing the electricity price as of July 1. Petroleum traders are making statistics on their losses to receive state compensation and plans to increase petroleum prices if the international oil price continues rising.

An official of the Vietnam Petroleum Import Export Corporation (Petrolimex) said the government’s holding of retail prices of key goods has made Petrolimex lose billions of VND.

The local air transport industry has also suffered from the sky-rocket of oil prices in the international market. Jetstar Pacific, the first low-cost airline of Vietnam, has announced it will cancel opening two new air routes because of high oil prices.

An official of Jetstar Pacific said the price of aircraft oil is $115/barrel. Jet A1 gas for aircraft is $140/barrel, including tax. At these levels, fuel makes up to 55% of Jetstar Pacific’s total expenditures.

“As the ceiling airfare for local air routes is set at VND1.7 million, airways suffer increasing losses,” he said.

Vietnam Airlines is in the same situation. The firm had to pay an additional VND491 billion for fuel in the first three months of 2008. The number is estimated to reach VND2.2 trillion (US$137.5 million) in 2008.

According to an official of Vietnam Airlines, petroleum enjoys tax rate of zero percent but the tax rate is 15% for gas for aviation transport. He said air carriers may ask the government to lift the ceiling airfare to VND2 million for domestic flights.

Experts said it is unable to hold back the prices of all other essential goods by administrative measures because the consequences would be very serious for the remaining months of the year.

Dr. Nguyen Minh Phong, Head of the Hanoi Department of Social-Economic Research, said it seems that the government made a mistake when it fixed a deadline for maintaining prices till the end of May 2008. All businesses wait for this moment to adjust their prices so if the government doesn’t have proper measures, consequences will be very serious.

Phong said that even if the government extends the deadline till later this year or early next year, the prices of essential goods will still increase massively after that deadline.

Dr. Tran Dinh Thien, Head of the Economics and Monetary Division under the Vietnam Economic Research Institute, said Vietnam is facing increasing inflation due to the rocketing of oil prices in the world market, drought, epidemics in cattle and poultry and the increase of prices of input materials

In this context, the country must select one of two solutions: loosening the pricing policy or continuing to hold back prices to curb inflation.

If Vietnam continues to hold back prices, it will face smuggling, a drain of fuel and natural resources overseas. If Vietnam doesn’t increase fuel prices, illegal exportation to neighbouring countries will become a big problem.

If Vietnam loosens the prices of some kinds of goods, it has to accept high inflation. The common consumer will suffer losses but businesses will benefit. The state will not have to compensate businesses and suffer losses caused by smuggling and prices will gradually catch up with the market levels.

“The government will have to carefully choose a solution which is suitable to Vietnam’s economic conditions and the population’s resistance,” Thien emphasised.

Speaking to reporters on the sideline of the NA session in Hanoi on May 6, Finance Minister Vu Van Ninh said the Vietnamese government’s policy is pursuing a market-price mechanism so the prices must be decided by the market. The government has intervened in prices recently to temporary solve matters. This is a way to share the burden of price storms with the people and enterprises.

However, Ninh emphasised that the intervention can’t continue because the intervention may warp the market. Moreover, the government can’t afford it. The Finance Minister cited an example: oil prices in the local market are much lower than those in the region and lower than the import prices. If the oil price stands at $100-110/barrel, the government is able to compensate companies for losses, but if it climbs to $120/barrel in the world market, the compensation would be too big.

“When inflation is under control at some level, the government will have to pursue the price-market mechanism,” Ninh said.

The public worries that after a period of time under the government’s control, prices will boom after June and it will affect the government’s efforts to control inflation. But Ninh said the government will have a roadmap for price increases and will not increase the prices of the ten essential goods till the end of June.

The government can’t early announce the list of items that will have their prices up after June because it is afraid of bad impacts on the economy, he said.

Deputy Prime Minister Nguyen Sinh Hung also said the government will maintain the prices of key materials like oil, rice, steel and cement.

(Source: VietNamNet, VNE)